Paul Asel, Author at Global Trade Magazine

Highlighting the startups to watch in the current investment climate

The logistics industry has attracted over $100B in venture funding and produced over 40 unicorns, including 15 such exits, since 2015. Global venture investment in the logistics industry increased ten times during this period.

The largest winners have been last mile consumer marketplaces such as Doordash, Deliveroo, and Postmates. Multi-modal freight companies such as Flexport and Convoy in the US and Manbang and LalaMove in China have also exceeded unicorn status or $1 billion valuations. Investment initially focused on last mile delivery, multi-modal efficiency, and reducing industry fragmentation through consolidation. The onset of COVID brought additional attention to supply chain resiliency and flexibility.

My team and I have actively invested in logistics and transportation for a decade and have made over 20 investments – including six unicorns – across the US. Europe, and Asia. In this article, I will dive into the recent trends and opportunities in the logistics industry, and explore how startups and scale-ups, are working on tackling global supply chain challenges.

Supply Chain Resiliency and Flexibility

For the past three decades, companies and logistics firms have focused on cost and inventory reduction. This approach optimized efficiency during stable conditions, yet COVID highlighted implicit costs of supply chain rigidity when disruptions occur. McKinsey has found that supply chain disruptions lasting more than one month occur every 3.7 years costing companies about 40% of a year’s profits every decade on average.

Companies are focusing on supply chain resiliency and flexibility to optimize across the full product lifecycle including anticipated disruptions. Multi-modal logistics providers such as Flexport and Next Trucking have found opportunities for efficiency and resiliency as multi-modal nodes increase. Others like Stord, Flexe, and Spacefilll offer flexible warehouse solutions to dynamically route product flows.

Supply Chain Intelligence

Data lakes can easily become muddy ponds as complex, fragmented supply chains tend to produce dirty data. Walmart, Volkswagen and Nestle each reportedly have over fifty third-party logistics providers leaving their customers to contend with a plethora of siloed data. Adding further complexity, producers know their direct suppliers but lack visibility into their myriad indirect suppliers across long value chains.

Muddy data frustrate efforts to derive actionable insights. The logistics industry generally does not run on a modern software stack. Instead, companies are saddled with old software and technology debt with balkanized data siloes that frustrate the adoption of leading analytics software.

A new generation of software companies is emerging to address these challenges. Startups such as Project44, FourKites and Shippeo offer supply chain visibility solutions to help companies monitor the flow of shipments and adjust in real-time disruptions. Pando and CognitOps offer solutions to optimize workflow within warehouses.

Automation and Robotics

Over 200 robotics and automation companies exhibited in March at Modex, about a quarter of all showcased companies and over four times the number represented just a few years ago. Automation is a rapidly growing field as warehouse operators explore solutions to deal with increased throughput volume, tight labor markets and rising operating costs. The payback period on automation solutions is declining as robots become more dexterous, efficient, and intelligent.

SVT Robotics offers insight into robot deployment with a solution that orchestrates automation in a multi-robot environment. Large warehouse operators report reduced labor by 30% or more as they move from pilots to broad robot deployment in the past two years.

Onshoring and Nearshoring

In 2021 Intel and TSMC both broke ground on large semiconductor fabs in Arizona. Intel and TSMC are expected to invest $20 and $12 billion, respectively, which will onshore chip production previously fabricated in Asia.

Multinational companies across many industries are moving production onshore or nearshore. As global supply chains fracture with trade wars and COVID, reshoring production improves supply chain risk and resiliency. The U.S. government has announced over $100 billion in investment to improve transportation infrastructure in support of these initiatives.

Automation is also improving the unit economics of reshoring independent of political considerations. Multinationals have offshored manufacturing for decades to reduce production costs with lower cost labor. Robotic automation reduces labor arbitrage making it less costly for onshore or nearshore production in many cases. Automation also helps disaggregate production enabling companies to onshore some processes even if core production operations remain overseas.

Electric Vehicles

Electric vehicles are getting traction in the logistics industry much as in the consumer sector. Rivian, which received a $700 million investment from Amazon in 2019, doubled its production rate in the second quarter and claims to be on pace to produce 25,000 vehicles in 2022.

Electric vehicles are also unlocking new modes of distribution. Over 150,000 cargo bikes have been sold in Germany and France in the past year integrating with logistics providers to improve last mile delivery efficiency while reducing congestion and emissions in cities.

Investment Prospects and the Economy

Predictions are hard, especially those about the future. Stock markets slid well into bear market territory in June as NASDAQ dropped to 33% below January price levels. The United States added 372,000 jobs in June and the labor market remains tight, yet NGP Capital Q proprietary data indicates that job openings have declined by 39% since February among 12,000 venture-backed companies. Amazon, an e-commerce bellwether benchmark, announced they will cancel or defer plans for at least 16 warehouses in 2022 due to slower e-commerce sales. The logistics industry has fared better than most, yet venture funding is likely to decline in 2022 for just the second year since 2017 according to NGP Capital Q data.

While the economic outlook is cloudy, I remain optimistic about prospects for innovation in the logistics sector. Its clear significant opportunities remain to reconfigure the supply chain bringing flexibility and resiliency, offer end-to-end visibility and intelligence, and increase automation.

Downturns are a good time to be an entrepreneur. Apple, Cisco, Google, and Microsoft were founded during economic downturns. Among the nine logistics unicorns listed in the first paragraph, seven were started when venture funding was relatively scarce. Low tides favor capable entrepreneurs as they can build companies with fewer copycat competitors and with less cash over longer timelines meaning less ownership dilution for management and investors alike.

Paul Asel is a partner at NGP Capital. NGP Capital is a global venture capital firm with over $1.6 billion under management, investing in growth-stage technology companies within the Edge Cloud, Cyber Security, Digital Industry, and Digital Transformation. NGP Capital backs entrepreneurs building a responsible and inclusive world where the confluence of sensors, mobility, software, and cloud solutions will connect people and industries in new ways, transforming how we live and work. Since 2005 NGP Capital has invested in more than 100 companies, 18 of these have achieved unicorn status. NGP Capital is active in Europe, U.S., and China. Visit www.ngpcap.com for more information.

The logistics industry is watching closely as United States and China negotiate to resolve their trade war amidst the threat of higher tariffs starting March 1. At stake is $635 billion in annual trade – China exports $505 billion and imports $130 billion with the US^[i]. These negotiations have repercussions for the global economy well beyond the US and China. Many industries engage vast trade networks that span myriad countries leaving few markets or nations exempt from these talks. For the US alone, which imports $2.3 trillion and exports $1.5 trillion annually^[ii], its entire trade regime is now in play.

Countries are not alone in broiling trade disputes. This month XPO issued a profit warning citing the expected loss of $600M^[iii], or 3.5%, of revenue from an unnamed customer. Amazon, widely believed to be XPO’s unidentified customer, is expanding its own logistics capacity. The expansion of e-commerce has been a boon for the logistics industry and bane for traditional retailers. Now as Amazon develops its own distribution capability, logistics providers and retailers alike are threatened.

Global Logistics – an Industry in Transition

Ecommerce has been a key growth driver for the global logistics industry, which is expected to grow 7.5% annually from $8.1 trillion in 2015 to $15.5 trillion in 2023^[iv]. The logistics of delivering directly to consumers is far more intensive than distributing in bulk to big box retailers. Long haul full truckload remains the largest market segment in logistics with a 70% share, yet less than truckload, parcel and intermodal – which together comprise 15% share of the logistics market – are fastest growing.

The politics of logistics extends beyond trade disputes. US freight employs over three million truck drivers. As the graph below indicates, trucking is the largest employer in 29 of 50 states across the US. The American Trucking Association estimates a need for an additional 900,000 truckers^[v] over the next ten years to keep up with demand. The industry already faces a shortage of over 50,000 drivers^[vi]amidst the need to replace an aging workforce: 57% of US truckers are over 45 years old and 37% are over 55^[vii]. Given the backlash over Amazon’s recent pullback of a second headquarters in New York City for 25,000 jobs^[viii], one might imagine the political stakes involved with four million truck drivers across the US in the coming decade.

Logistics – a Magnet for Venture Capital Investment

Venture capital has poured into the logistics sector in recent years. In 2018, global venture investment in logistics reached nearly $14 billion, more than the three previous years combined. Funding for supply chain, logistics and shipping businesses continues to grow in 2019. In February alone, investors have committed over $5 billion to the logistics sector. Major financings include a $1 billion investment in Flexport for intermodal logistics, $940 million in Nuro for its self-driving delivery vans, $700 million in Rivian for electric delivery vehicles, $400 million in DoorDash for local food delivery, and $300 million in Hong Kong-based Lalamove for last mile delivery.

Five catalysts are driving innovation and investment in the logistics sector:

Ecommerce: Online retail continues to cannibalize physical retail. Ecommerce in the US reached 9.8% of total US retail in 2018, nearly triple the share of retail ten years earlier^[ix]. Ecommerce is growing even faster in Asia, Europe and the Middle East. Traditional retailers are embracing omnichannel marketing as ecommerce extends to more retailing categories. The physical landscape will change dramatically in the decade as ecommerce players build more warehousing capacity replacing stores due to overcapacity in the traditional retail sector.

Crowdsourcing: Much as Uber, Lyft and Didi among others have disrupted the taxi industry through crowdsourced drivers, the gig economy is infiltrating the logistics sector enabling new services. Consumers are the biggest beneficiary through the rise of the concierge economy. Crowdsourcing has lowered delivery costs making home deliveries available for a broader range of items. Food delivery has received most funding with the rise of Uber Eats globally, Doordash and Postmates in the US, Just Eat and Deliveroo in Europe, Swiggy in India, and Meituan in China.

Intelligent Automation: The securities brokerage industry has gone digital in the past two decades. The logistics brokerage industry still runs on phone calls and fax machines with limited price transparency and inefficiencies borne by limited supply chain visibility. Digital brokerage is now coming to the logistics sector through the confluence of sensors, cloud and intelligent automation. ELD and camera technology now monitor drivers reducing wait times, reducing accident risk, and helping to adjudicate cases when accidents occur. Venture backed companies that have raised $100 million or more in the US alone include Convoy, Flexport, Nauto, Next Trucking and Transfix, amongst others.

Electric Vehicles: The prospect of replacing diesel trucks is as welcome as replacing gas vehicles in the consumer sector. Tesla is now tackling the challenges of transporting large trucking payloads. Others are as well including the recently funded Rivian Automotive and Thor Trucks.

Autonomous Technology: End-to-end autonomous trucking may still be decades away yet the use of autonomous technology in logistics is already live in the warehouse with pilots underway for first and last mile as well as interstate long-haul deliveries. Autonomous delivery startups announced over $1.5 billion in February alone, including Endeavor Robotics, Ike and Nuro in the US and AutoAI, Mogu Zhixing and TuSimple in China.

Logistics is a vast sector ripe for innovation across the supply chain. Entrepreneurs and investors have flocked to logistics seeking to disrupt an industry representing over 5% of the US economy. While investment in logistics has increased substantially, funding has focused on major sectors. We believe many opportunities remain for further innovation across the supply chain as new technologies such as robotics, autonomous vehicles and machine learning develop for the logistics sector.

^[i] Stifel analyst report

^[ii] Stifel analyst report

^[iii] https://www.thestreet.com/investing/xpo-plummets-on-earnings-miss-and-warning-about-2019-14868169

^[iv] https://www.prnewswire.com/news-releases/global-logistics-market-to-reach-us155-trillion-by-2023-research-report-published-by-transparency-market-research-597595561.html.

^[v] May 2018 Techcrunch article

^[vi] May 2018 Techcrunch article

^[vii] Stifel analyst report

^[viii] https://www.nytimes.com/2019/02/14/opinion/amazon-new-york.html

^[ix] https://ycharts.com/indicators/ecommerce_sales_as_percent_retail_sales

How Logistics Startups are Tackling Global Supply Chain Challenges

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